Pension Plan Lump Sum Distributions

Many pension plans will allow you the choice of receiving a monthly pension payment for the rest of your life or taking a lump sum distribution equal to the value of their pension. There are positives and negatives as to whether a lump sum might be a good idea for you.

When a Lump Sum is a Good Idea

  • Should I take a lump sum distribution?A pension is taxable income. If you do not need monthly payments right away, you could defer recognizing the income until you are 70 ½ similar to an IRA.
  • If the pension is not indexed to inflation, a monthly pension payment of $2,000 will be worth only $1,488 in 10 years and $1,107 in 20 years. Investing your lump sum prudently may better protect you from inflation.
  • Current interest rates are low and pensions are generally benchmarked to prevailing rates. If you believe that rates will rise, which is a strong possibility, then taking a lump and investing it based on a rising interest rate strategy may be a better idea.
  • If you are a skilled investor or have a financial advisor who is a fiduciary, investing your lump sum properly may give you greater control over your lifestyle. For more information on what a fiduciary is, please click here.
  • If you have the means and you wish to leave a legacy to your children or a charitable organization, a lump sum will help you to achieve those goals.

When a Lifetime Pension Payment is Good Idea

  • If you are not a skilled investor, the certainty of monthly payments may have greater value to you.
  • Even if you are a skilled investor but are very concerned about managing such a significant amount of your wealth, the certainty of a pension may reduce everyday stress.
  • If the value of the pension payments materially exceed the lump sum payment. This sometimes happen in cases where a company creates early retirement incentives.

In all cases, it may be prudent to seek advice from a qualified fiduciary to evaluate your options. A fiduciary is required to put your interests ahead of their own. If you choose the lump sum distribution, be aware of any advisor who recommends annuity for your lump sum distribution – your monthly pension payment that you just traded for the lump sum is an annuity.

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